difference between equity and equality

Equity, Equality and the Redistribution of Income & Wealth (Cambridge A‑Level Economics 9708 – Topic 8.2)

Learning objectives

By the end of this lesson students should be able to:

• Distinguish clearly between equality (same treatment) and equity (fair treatment based on different circumstances).
• Define absolute and relative poverty and explain the concept of a poverty trap, including the term effective marginal tax rate.
• Explain how inequality is measured using the Lorenz curve and the Gini coefficient, and sketch a simple Lorenz‑curve diagram.
• Identify the main policy tools used to achieve equity (progressive income tax, inheritance tax, means‑tested transfers, negative income tax, universal basic income, universal basic services).
• Evaluate the advantages and disadvantages of each tool and relate redistribution to the macro‑economic objectives of growth, employment, price stability and the external balance.

1. Equality vs. Equity

Equality

Equality means giving everyone the same amount of resources or the same opportunity, irrespective of their starting point.

• Horizontal equality – identical treatment of individuals or groups who are at the same point in time.
• Vertical equality – identical treatment across different points in time (e.g., a flat tax rate applied to all income brackets).

In a Lorenz‑curve diagram the line of perfect equality is a 45° line: every percentile of the population receives the same share of total income.

Equity

Equity recognises that people begin from different circumstances; a fair outcome therefore often requires unequal treatment.

• Focuses on fairness and justice rather than identical outcomes.
• Achieved through policies that adjust the distribution of income or wealth.
• Two concepts are frequently mentioned (optional extension):
  • Vertical equity – different treatment for people at different income levels (e.g., higher marginal tax rates for higher incomes).
  • Horizontal equity – equal treatment of equals (people with similar circumstances receive similar support).

Mathematical illustration – a simple progressive tax function:

\(T(y)=\alpha\,y^{\beta},\qquad \beta>1\)

where \(T(y)\) is tax paid on income \(y\), \(\alpha\) is a constant, and \(\beta>1\) makes the marginal tax rate rise with income, reflecting a more equitable burden.

2. Poverty – Absolute, Relative and the Poverty Trap

• Absolute poverty: living below a fixed standard of basic needs (e.g., the international poverty line of US$2.15 per day).
• Relative poverty: living below a set proportion of the average national income (commonly 60 % of median household income). It highlights social exclusion even when basic needs are met.
• Poverty trap: a situation where low‑income households face a high effective marginal tax rate after receiving benefits, making additional work unattractive and keeping them in poverty.
  Example: a household earns £10,000 and receives £3,000 in benefits. A £2,000 pay rise would:
  • Increase tax by £300 (30 % marginal rate on the extra £1,000 that falls into a higher bracket), and
  • Reduce benefits by £1,200 (a 40 % withdrawal rate).
  Net gain = £2,000 – (£300 + £1,200) = £500 → effective marginal tax rate = 75 %. This high rate can discourage further work.

3. Measuring Inequality

• Lorenz curve: plots the cumulative share of income received by cumulative percentages of the population, ordered from poorest to richest. See Figure 1 (sketch placeholder).
• Gini coefficient: the ratio of the area between the line of perfect equality and the Lorenz curve (area A) to the total area under the line of equality (areas A + B).
  Formula: \[G=\frac{A}{A+B}\]
  Range: 0 = perfect equality, 1 = perfect inequality.

4. Policy tools used to achieve equity

5. Evaluation of the major tools

6. Links to macro‑economic objectives

• Economic growth: Redistribution raises the disposable income of low‑income households, who have a higher marginal propensity to consume, boosting aggregate demand.
• Employment: Tools that minimise the poverty trap (e.g., NIT, well‑designed means‑tested benefits) encourage labour‑market participation.
• Price stability: If redistribution is financed by existing tax revenue, it is largely neutral; large deficit‑financed transfers could be inflationary.
• External balance: Higher domestic consumption may increase import demand; policymakers must watch exchange‑rate effects and the current‑account balance.

7. Suggested diagram

Figure 1: Lorenz curves illustrating (a) perfect equality, (b) the pre‑redistribution distribution, and (c) the post‑redistribution distribution after an equity‑oriented policy. The Gini coefficient falls from the middle curve to the right‑most curve, showing reduced inequality.

Insert sketch here – a simple three‑curve Lorenz diagram with the 45° line of equality.

8. Quick‑check questions

1. Explain why a flat tax is an example of equality but not equity.
2. Give one real‑world policy that aims to achieve equity rather than equality and state which tool it belongs to.
3. Using the progressive tax function \(T(y)=\alpha y^{\beta}\), calculate the percentage change in tax paid when income doubles and \(\beta=1.5\).
4. Identify one advantage and one disadvantage of a negative income tax in terms of both equity and efficiency.
5. How does means‑tested assistance potentially create a poverty trap? Illustrate with a brief numeric example, naming the effective marginal tax rate.